General Summary of S.F. 810 (Pogemiller); H.F. ___ ( ):

S.F. 810 (Pogemiller); H.F. _____ ( ) amends various provisions of Minnesota Statutes, Chapter 273, relating to local property taxes and state aid to local governments; Chapter 353, relating to the Public Employees Retirement Association (PERA); and Chapter 356, relating to public retirement generally; by making the following changes with respect to PERA General Employee Retirement Plan (PERA-General) and Public Employees Police and Fire Retirement Plan (PERA-P&F):

1. Broadened Membership Eligibility. With the exception of newly excluded seasonal (under 185 days of employment per year) employees and work-study employees, all local government and non-teaching school district employees on and after July 1, 2002, are required to become members of PERA-General (Article 1);
2. Proration of Benefit Calculation Service Credit For Part-time Employees. For PERA-General and PERA-P&F members employed less than half-time (under 80 hours per month), after July 1, 2002, service credit for benefit calculation purposes would be prorated (Article 2);
3. Increased Coordinated Member and Employer Contribution. Beginning in January, 2002, PERA-Coordinated Program member and employer contribution rates each would be increased by 0.375 percent of covered payroll, and, if the PERA-General financing deficiency continues, beginning in January, 2004, PERA-Coordinated Program member and employer contribution rates would again each be increased by 0.25 percent of covered payroll (Article 3, Section 1);
4. Extended Amortization Target Date. The current 2024 amortization target date for eliminating the PERA-General unfunded actuarial accrued liability is extended seven years, to 2031 (Article 3, Section 2);
5. Five Year Vesting Requirement. For new entrants after June 30, 2002, the service requirement for obtaining a vested PERA-General retirement annuity or benefit is increased from three years to five years (Article 4, Sections 1, 2, 3, 4, 9, and 11);
6. Refund of a Portion of Employer Contributions. After June 30, 2001, vested PERA-General members who terminate active service receive an enhanced refund, including 25 percent of the employer contribution plus interest below age 55 and 50 percent of the employer contribution plus interest after age 54 (Article 4, Sections 5, 6, 7, 8, and 10);
7. Reduced Deferred Annuities Augmentation Rate. The deferred annuity augmentation rate for vested PERA-General or PERA-P&F members who terminate active service for a period before applying for a retirement annuity would be reduced from five percent (after age 55) to three percent for all ages (Article 4, Section 12);
8. Increased State Aid to PERA Employing Units. The 1997 state aid program for local government units and school districts is increased, with an additional annual $27 million in State revenue allocated to employing units in proportion to their total covered payroll to offset increased employer contribution rates (Article 5, Section 1); and
9. Increased PERA-General Employer Additional Contribution Rate. Effective August 1, 2001, the PERA-General employer additional contribution increases by 0.75 percent (to 1.18 percent of covered payroll).

S.F. _____ ( ); H.F. 855 (Mares) is identical to S.F. 810 (Pogemiller); H.F. _____ ( ) as summarized above, EXCEPT it does not include the increased state aid to PERA employing units (point 8, above) or an increased PERA-General employer additional contribution rate (point 9, above).

A section-by-section summary of S.F. 810 (Pogemiller); H.F. ____ ( ) and a section-by-section summary of S.F. _____ ( ); H.F. 855 (Mares) are attached.

1. General Background Information On PERA. The Public Employees Retirement Association (PERA) was established in 1931. The legislation governing the plan was modeled heavily on the 1929 law governing the State Employees Retirement Association (SERA), renamed in 1969 as the Minnesota State Retirement System (MSRS). PERA was the third major statewide public pension plan established by the Legislature, following the creation of the predecessor to the Teachers Retirement Association (TRA) in 1915 and the creation of SERA in 1929. PERA was the second public pension plan that was established by the Legislature for local government general (not specifically police or fire) employees, after the Minneapolis Municipal Employees Retirement Plan (now the Minneapolis Employees Retirement Fund (MERF)) in 1919. The 1931 PERA plan was the predecessor to the current PERA General Employee Retirement Plan.
   
   Because PERA preceded the creation of the Social Security system (federal Old Age, Survivors, and Disability Insurance Program (OASDI)) and because Social Security initially did not extend to federal, state, or local government employees, PERA was a "basic" program. This means that the public employee’s entire retirement benefit comes from the public pension plan, without any Social Security benefit. PERA coordinated with Social Security for hospital employees in 1963 and for other local government employees in 1967.
   
2. Background Information On PERA Funding Developments. The funding of PERA has been a continuing concern for the Commission since the creation of the Commission in 1955, which was reportedly prompted by the predicted financial bankruptcy of PERA.
   
   Although PERA was established in 1931, actuarial valuations did not begin until 1943 and complete regular biennial or annual actuarial valuations did not begin until 1958. The 1955 special actuarial valuation indicated that PERA was 11.32 percent funded, with ongoing funding limited to member contributions only (four percent of pay), and with liabilities growing at a rate of 14 percent of pay. The results of the various past PERA actuarial valuations are summarized, from most recent (1999) to least recent (1943), in Attachment A.
   
   In 1931, when PERA was established, the retirement plan was designed to be funded on a non-actuarial or "pay-as-you-go" basis. Local government employees in 1931-1932 were required to pay an initial application fee ($1 in 1931, $10 in 1932), were obligated to make member contributions of 3.5 percent of regular salary, and post-January 1, 1932, members were required to pay back member contributions to July 1, 1931, plus five percent compound interest. There was no employer contribution required.
   
   In 1941, governmental subdivisions that impose a mandatory retirement age limitation on employment were required to pay one-half of the cost of all retirement annuities granted to public employees affected by mandatory retirement provisions, based on a PERA determination and certification.
   
   In 1943, the member contribution was increased to four percent.
   
   In 1956, governmental subdivisions that had elected to participate in PERA were required to make an employer contribution, with the employer contribution set at an amount equal to one-half of the member contributions of its employees (i.e., two percent of pay). Covered salary was also limited to $4,800 in 1949.
   
   In 1956, the employer contribution was increased to four percent of salary, subject to a salary maximum of $4,800. In 1957, the member contribution was increased to six percent of salary, up to a salary maximum of $4,800. The employer contribution was increased to five percent of covered salary for fiscal year 1958. For fiscal year 1959, the employer contribution was increased to six percent of covered salary and a 2.5 percent of covered salary additional employer contribution was imposed.
   
   With the creation of a coordinated program for some hospital employees in 1963, the hospital coordinated member contribution was set at three percent of covered salary, while the hospital coordinated employer contribution was also set at three percent of covered salary and the hospital coordinated additional employer contribution was set at two percent of covered salary for fiscal years 1964 and 1965 and at 1.5 percent of covered salary for fiscal years after 1965.
   
   In 1965, the covered salary amount for both contributions and retirement annuity calculations increased from $4,800 to $6,000. In 1967, covered salary was increased to total salary. Also, in 1967, following a generally-applicable "split basis" Social Security referendum, the PERA coordinated program contribution rates were revised, at three percent of covered salary for the member contribution rate and for the employer contribution rate, and at 1.5 percent of covered salary for the additional employer contribution. In 1971, the PERA Hospital Employee Coordinated Program was transferred into the regular PERA Coordinated Program.
   
   In 1973, contribution rates were increased. The member contribution rates were increased to eight percent of covered salary for the PERA Basic Program and to four percent of covered salary for the PERA Coordinated Program. The employer contribution rates were increased to equal the member contribution rates, while the additional employer contribution remained at 2.5 percent of covered salary for the PERA Basic Program and at 1.5 percent of covered salary for the PERA Coordinated Program.
   
   In 1984, the PERA Coordinated Program additional employer contribution was decreased from 1.5 percent of covered salary to 0.25 percent of covered salary.
   
   In 1989, contribution rates again were increased. The member contribution rates were increased to 8.23 percent of covered salary for the PERA Basic Program and to 4.23 percent of covered salary for the PERA Coordinated Program, with the employer contribution rates increasing by the identical amounts.
   
   In 1997, contribution rates were again increased. The member contribution rates were increased to 8.75 percent of covered salary for the PERA Basic Program and to 4.75 percent of covered salary for the PERA Coordinated Program. The employer contribution rates increased identically, while the additional employer contribution rates increased from 2.5 percent to 2.68 percent for the PERA Basic Program and from 0.25 percent to 0.43 percent for the PERA Coordinated Program. A special state aid program was created for fiscal year 1998 and thereafter to cover the 1997 employer contribution increases.
   
3. Impact on PERA of Recent Actuarial Assumption Changes

1. In General. Under Minnesota Statutes, Section 356.215, Subdivision 5, every four years, an experience study is required to be performed by the consulting actuary retained by the Commission for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA).
   
   The quadrennial experience study compares the actual experience of the pension plan for that five-year period with the expected experience for the same period under the actuarial assumptions then applicable for the pension plan. The quadrennial experience study is intended, along with the actuarial gain and loss assessment portion of the annual actuarial valuation, to identify the need for actuarial assumption revisions.
   
   Once a series of the actuarial gain and loss assessments of the annual actuarial valuations and one or more quadrennial experience studies indicate that an actuarial assumption has become an unreliable predictor of future occurrences, the process of developing a more reliable actuarial assumption and implementing a new actuarial assumption is initiated.
   
   Because the actuarial services rendered to the Commission and the various public pension plans are provided by a combination of sources, chiefly the consulting actuary retained by the Legislative Commission on Pensions and Retirement and the consulting actuary retained as actuarial advisor by the applicable public pension plan, the task of the development of new actuarial assumptions can be performed by either consulting actuary or in combination. If there is a difference of opinion between these actuaries, professionally or personally, the development of new actuarial assumptions can be delayed or totally derailed.
   
   Once revised actuarial assumptions are developed by an actuary, the revisions must be implemented. Minnesota Statutes, Section 356.215, Subdivision 4d, specifies the major economic actuarial assumptions, namely the interest (future investment performance) assumption, the salary growth (individual member) assumption, and the total payroll growth (total plan membership) assumption. Minnesota Statutes, Section 356.215, Subdivision 4e, requires the use of demographic and other economic actuarial assumptions that are consistent with the most recent quadrennial experience study (or the best estimate of future occurrences if no experience study for the applicable pension plan is required) and Minnesota Statutes, Section 356.215, Subdivision 7, requires the approval of nonstatutory actuarial assumptions by the Legislative Commission on Pensions and Retirement.
2. Annual PERA Experience Gain and Loss Assessments 1985-2000. The annual actuarial valuations are required to contain an exhibit that attempts to allocate the sources of increases and decreases in the unfunded actuarial accrued liability of the pension plan. Four experience gain or loss items (five before 1986) are required to be assessed in the actuarial valuation, which are salary increase, investment return, retiree (Minnesota Post Retirement Investment Fund) mortality, and other benefit recipient (non-MPRIF) mortality. Other gains or losses are not required to be separately identified, although the Standards For Actuarial Work prescribed by the Commission require that additional analysis should be performed if the undesignated "other" items of unfunded actuarial accrued liability change is greater than two percent of the actuarial accrued liability or exceeds $50 million.
   
   The following sets forth the annual actuarial gain and loss identification for PERA for the past 16 years (since the actuary retained by the Commission has performed the regular annual actuarial valuation):

Note: $123,456,000 indicates an actuarial loss
($987,654,000) indicates an actuarial gain

The period 1985-2000, as assessed by the annual actuarial valuation gain and loss analysis, reflects significant salary gains (gains in 13 of the 16 years, averaging almost $65 million per year of gain), very significant investment gains (gains in 13 of the 16 years, averaging over $135 million per year of gain), modest retiree mortality losses (losses in 13 of the 16 years, averaging $10 million per year of loss), mixed gains and losses in other benefit recipient mortality (gains in 9 years and losses in 7 years), and relatively significant "other" losses (losses in 15 of 16 years, averaging over $85 million per year of loss).

3. 1996 PERA Experience Study Results and 2000 Assumption Changes. The 1996 PERA experience study covered the period June 30, 1992 to June 30, 1996, and was reported to the Commission on May 29, 1997.
   
   The following summarizes the results of the 1996 PERA-General experience study and the recommendations of the actuary retained by the Commission:

Assumption	Analysis Observation/Conclusion	Recommendation
Interest	Investment experience was favorable, averaging 12.9 percent, compared to the preretirement assumption of 8.5 percent.	Recommended retention of both the preretirement interest rate assumption and the postretirement interest rate assumption.
Salary Increase	Salary increases averaged 5.5 percent, with increases both age and service related and with the strongest correlation to service.	Recommended breaking the assumption into two components, a base increase assumption and a merit and longevity increase assumption. Recommended base increase rate of 4.5 percent and development of an assumption based on an age, service, or both by the plan and Commission actuaries.
Payroll Growth	Flat 6.5 percent assumption ignores the potential for increases/decreases in the number of active members and the impact of replacement active members.	Recommended breaking the assumption into two components, a base salary increase assumption and a total active membership growth assumption.
Retirement	Single age retirement assumption does not reflect the actual experience of retiring members, especially related to the utilization of the "Rule of 90" early normal retirement age. Period results also reflect the impact of early retirement incentives.	Recommended the development of an age-related retirement decrement table to more closely reflect future expected retirement patterns.
Optional Annuity Selection	Number of married retiring active members probably greater in the Basic Program than the Coordinated Program, based on the utilization of the subsidized joint and survivor optional annuity form.	Recommended no change.
Active Member Disablement	Actual disability rates are well below expected, especially for females.	Recommended that the disablement rates should be reduced, especially for females.
Active Terminations	Total active terminations are close to the assumption, but withdrawal rates are strongly correlated with both service and age. Potential data inconsistencies also exist.	Recommended that specific select and ultimate withdrawal tables be developed.
Annuitant Mortality	Annuitant mortality has been considerable below expected, especially ages 65-84.	Strongly recommended strengthening of the mortality assumption.
Disabled Mortality	Assumption is favorable, but relatively close to reality.	Recommended retention of assumption.
Active Mortality	Assumption experience is unfavorable.	Recommended consideration of a separate table with strengthened assumption.

4. Current PERA-General Financing Insufficiency. The July 1, 2000, PERA-General actuarial valuation indicted a 1.96 percent of covered payroll ($70.4 million) annual deficiency when the financial support (required member, employer, and employer additional contributions) of the pension plan is compared to the actuarial requirements of the pension plan. The results of that valuation are summarized and compared with the 1996, 1997, 1998, and 1999 valuation results, as follows:

		1996		1997		1998		1999		2000
Membership
Active Members		129,431		130,865		136,166		137,528		135,560
Service Retirees		32,906		34,168		36,187		38,077		39,940
Disabilitants		1,051		1,115		1,223		1,301		1,397
Survivors		5,423		5,531		5,732		5,881		6,010
Deferred Retirees		8,605		10,817		10,817		16,340		21,495
Nonvested Former Members		11,448		15,162		15,162		18,491		79,362
Total Membership		188,864		197,658		205,287		217,618		283,764
Funded Status
Accrued Liability		$7,270,073,000		$8,049,666,000		$8,769,303,000		$9,443,678,000		$11,133,682,000
Current Assets		$5,786,398,000		$6,658,410,000		$7,636,668,000		$8,489,177,000		$9,609,367,000
Unfunded Accrued Liability		$1,483,675,000		$1,391,256,000		$1,132,635,000		$954,501,000		$1,524,315,000
Funding Ratio	79.59%		82.72%		87.08%		89.89%		86.31%
Financing Requirements
Covered Payroll		$3,073,106,000		$3,214,578,000		$3,385,720,000		$3,544,488,000		$3,602,750,000
Benefits Payable		$312,511,000		$342,154,000		$412,746,000		$467,602,000		$527,119,000
Normal Cost	6.85%	$210,507,761	7.11%	$228,459,000	7.61%	$257,628,000	7.49%	$265,778,000	9.33%	$336,088,000
Administrative Expenses	0.19%	$5,838,901	0.18%	$5,786,000	0.22%	$7,449,000	0.28%	$9,925,000	0.23%	$8,286,000
Normal Cost & Expense	7.04%	$216,346,662	7.29%	$234,245,000	7.83%	$265,077,000	7.77%	$275,703,000	9.56%	$344,374,000
Normal Cost & Expense	7.04%	$216,346,662	7.29%	$234,245,000	7.83%	$265,077,000	7.77%	$275,703,000	9.56%	$344,374,000
Amortization	2.71%	$83,281,173	2.51%	$80,686,000	2.01%	$68,053,000	1.67%	$59,193,000	2.38%	$85,745,000
Total Requirements	9.75%	$299,627,835	9.80%	$314,931,000	9.84%	$333,130,000	9.44%	$334,896,000	11.94%	$430,119,000
Employee Contributions	4.29%	$131,836,247	4.55%	$146,127,000	4.79%	$162,179,000	4.78%	$169,398,000	4.77%	$171,898,000
Employer Contributions	4.58%	$140,748,255	4.92%	$158,067,000	5.24%	$177,504,000	5.23%	$185,221,000	5.21%	$187,823,000
Employer Add'l Cont.	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0
Direct State Funding	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0
Other Govt. Funding	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0
Admin Assessment	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0	0.00%	$0
Total Contributions	8.88%	$272,584,502	9.47%	$304,194,000	10.03%	$339,683,000	10.01%	$354,619,000	9.98%	$359,721,000
Total Requirements	9.75%	$299,627,835	9.80%	$314,931,000	9.84%	$333,130,000	9.44%	$334,896,000	11.94%	$430,119,000
Total Contributions	8.88%	$272,584,502	9.47%	$304,194,000	10.03%	$339,683,000	10.01%	$354,619,000	9.98%	$359,721,000
Deficiency (Surplus)	0.87%	$27,043,333	0.33%	$10,737,000	(0.19%)	($6,553,000)	(0.57%)	($19,723,000)	1.96%	$70,398,000
Amortization Target Date	2020		2020		2020		2020		2024
Actuary	Milliman & Robertson		Milliman & Robertson		Milliman & Robertson		Milliman & Robertson		Milliman & Robertson

5. Comparison of Selected PERA-General Funding Information With Other Plans. The following compares selected funding information (funded ratio, employee and employer contribution rates, and administrative expenses) over time for PERA-General, the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), and the Teachers Retirement Association (TRA):

S.F. 810 (Pogemiller); H.F. _____ ( ) and S.F. _____ ( ); H.F. 855 (Mares) attempt to resolve the funding deficiency situation of the General Employees Retirement Plan of the Public Employees Retirement Association (PERA-General) by making several changes:

1. Enlarged Membership Eligibility. The current modest salary membership exclusion is eliminated and exclusions for seasonal employees and work-study employees are added;
2. Benefit Computation Service Credit Proration. Half-time employees would receive only prorated service credit for benefit computation purposes;
3. Member and Employer Matching Contribution Rates Increased. In two stages, January 2002, and January 2004, the PERA-General member and matching employer contribution rates are increased by 0.625 percent by each;
4. Amortization Target Date Extended. The target date used to calculate the suggested contribution requirement for amortizing the PERA-General unfunded actuarial accrued liability is extended from 2024 to 2031;
5. Lengthened Vesting Requirements. The vesting periods for various retirement annuities and benefits are increased from three years to five years;
6. Enhanced Refunds. Vested terminating members would be eligible for an additional refund of a portion of the accumulated employer contribution, plus interest (25 percent under age 55 and 50 percent over age 54);
7. Reduced Deferred Annuity Augmentation Rate. The rate of augmentation for deferred annuities over age 55 is reduced from five percent to three percent;
8. Increased Employer Additional Contribution and Offsetting State Aid Program. (S.F. 810 (Pogemiller); H.F. ____ ( ) Only). The PERA-General employer additional contribution rate is increased by 0.75 percent of covered payroll, offset by a $27 million annual additional State aid program for the various PERA covered employing units.

The two highly similar pieces of proposed pension legislation raise several pension and related public policy issues, including the following:

2. Appropriateness of Proposed Service Credit Proration. The policy issue is the appropriateness of the proposal for prorating the service credit used for benefit computation purposes for PERA-General, PERA-P&F, and PERA Local Correctional members who are employed less than half-time (less than 80 hours per month), effective July 1, 2002. Currently, PERA service credit is granted for a full month for any service that occurs in a month and is used for both vesting purposes and benefit computation purposes. The proposal would separate PERA allowable service credit into two parts, one for the purpose of vesting and one for benefit computation purposes, and would prorate benefit calculation service credit for certain part-time employees. While PERA argues that the provision aligns PERA with the service crediting methods of the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General) and of the Teachers Retirement Association (TRA), the proposed language does not replicate the practices of either of those plans. The service credit proration provision also would constitute a benefit reduction for some current PERA members. The Legislature, historically, has been very wary and slow to reduce benefits for any membership group, absent a showing of an abuse or a financial disaster. The proposed change also is delayed for more than one year. If the change is meritorious, consideration should be given to making the change more promptly.
3. Appropriateness of Imposing Longer Vesting Requirements. The policy issue is the appropriateness of increasing the vesting requirement for benefit entitlement from three years to five years for employees who become PERA-General members after June 30, 2002. The three-year vesting requirement was enacted in 1989, largely promoted by PERA at the time, and the prior five-year requirement was enacted in 1987, again largely promoted by PERA at the time. The reduced vesting requirements did not greatly increase the PERA actuarial requirements when enacted, so the change is unlikely to produce a significant actuarial requirement change now. If the lengthened vesting requirement makes good policy sense, consideration should be given by the Commission to broadening it to apply to current PERA members and accelerating its effective date of July 1, 2002. There are currently (i.e., 7/1/2000) over 57,000 PERA-General members with less than five years of service credit.
4. Appropriateness of Providing An Enhanced Refund Amount. The policy issue is the appropriateness of increasing the amount of a potential refund for terminating PERA members to include a portion of the employer contribution, varying in amount depending upon age. Currently, PERA and virtually all other Minnesota public pension plans limit refunds to the amount of the accumulated member contribution, plus six percent interest. The proposal would provide nonvested terminating PERA members with a refund of the accumulated member contributions plus interest, vested terminating PERA members under age 55 with a refund of accumulated member contributions and 25 percent of the accumulated member contributions, plus interest, and vested terminating PERA members over age 54 with a refund of accumulated member contributions and 50 percent of the accumulated member contributions, plus interest. The provision appears motivated by the recent turnover gain problems in PERA, where terminating members are not taking refunds and not producing turnover gains in the magnitude previously expected by the actuary based on past experiences. Given that most PERA members, under the current separation actuarial assumptions, are not expected to be in the fund at retirement age, attempting to further reduce the number of individuals who will ultimately receive a PERA benefit raises a real question about the purpose of the retirement plan and for whose actual benefit it exists. The proposal attempts to increase turnover gains by reducing each future gain. It is unclear whether this investment of resources in the form of a greater refund (and reduced gain from each refund) is the best mechanism to produce a net experience gain in fact. Also, the proposal will put the Commission on a potential slipping slope toward paying lump sum retirement benefits to retirement age terminating members and even greater refund principal and interest amounts in the future. While no refund of employer contributions is settled policy, these potential enhancement demands are relatively easy for the Commission and the Legislature to dissuade, but once employer contributions are paid in part, future demands for "cashing out" in a lump sum one’s retirement coverage at retirement or earlier termination can be expected. The age related proposed employer contribution refund amounts also may violate the federal Age Discrimination in Employment Act (ADEA) and should be carefully reviewed against current federal regulations and practices under that statute before receiving a Commission recommendation or legislative enactment.
5. Appropriateness of the Reduced Deferred Annuities Augmentation Rate. The policy issue is the appropriateness of the proposed reduction in the rate of deferred annuities augmentation for retirees after age 55. Minnesota is largely unique in public pension plan circles in providing deferred annuities augmentation (reportedly only Oregon has similar practices) and the practice is essentially unknown in the private sector. The augmentation rate, set some three decades ago, was initially three percent, was increased to five percent for all deferral periods in 1973, was reduced to three percent for all periods in 1980, and was set at three percent before age 55 and five percent after age 54 in the 1989 benefit increases sponsored by PERA and the other major retirement plans. Changing the rate for current, as well as future, deferred annuitants would represent a benefit downsizing. While there is precedent for downsizing the rate (see the 1980-1988 period), the Commission and the Legislature historically have been disinclined to impose these benefit takeaways.
6. Actuarial Impact of Proposed Benefit And Membership Changes. The policy issue is the progress to be made toward resolving the PERA funding problem by the membership and benefit changes proposed b the PERA Board in the proposed legislation. No actuarial cost estimates have been prepared by Milliman & Robertson, Inc., the consulting actuarial firm retained by the Commission, at the Commission’s request yet, or forwarded to the Commission by PERA. Since some of the proposed changes apply only to new hires and are delayed in the time of their implementation, it is unclear how great a magnitude of improvement in the PERA funding problem they produce. If the actuarial impact is modest, those changes with substantial additional adverse policy questions may not be worth further consideration.
7. Appropriateness of the Proposed PERA-General Benefit Changes In Light of Other Likely Benefit Improvement Proposals. The policy issue is the appropriateness of the Commission recommending the PERA-General benefit changes proposed by the PERA Board when other major Minnesota public pension plans have publicly indicated that they will be proposing various other benefit increases. Recommending benefit reductions in whole or in part for one pension plan while considering benefit increases proposed by other similar pension plans, including pension plans with funding problems similar to those experienced by PERA-General, would indicate at least some policymaking confusion. Likely benefit increase proposals for the 2000 Legislative Session include earlier normal retirement ages, shortened final average salary periods, and increased benefit accrual rates.
8. Adequacy of the Proposed Contribution Rate Increases. The policy issues are the adequacy of the proposed increases in PERA-General member and employer contribution rates. The current PERA-General financing shortfall is 1.96 percent of covered payroll. The two pieces of proposed legislation would implement the following contribution rate increases:

	S.F. 810 (Pogemiller)	H.F. 855 (Mares)
8/1/2000 Employer Additional	0.75%	--
1/1/2002 Member  Employer Matching	0.375%  0.375%	0.375% 0.375%
1/1/2004 Member  Employer Matching	0.25%  0.25%	0.25% 0.25%
Total	2.00%	1.25%

Given that the contribution rate increases under S.F. 810 (Pogemiller) accomplish the goal of eliminating the current PERA shortfall, it is unclear what is further to be gained by the various membership, benefit and actuarial method changes provided for in that bill.

9. Appropriateness of the Amortization Target Date Change. The policy issue is the appropriateness of the proposed increase for PERA-General in the amortization target date from the current date of 2024 to 2031. The amortization target date is the date used by the actuary to calculate the supplemental contribution required to retire the plan’s unfunded actuarial accrued liability on a level percentage of an increasing payroll basis. The target date was set at 2020 in 1989 and reset to 2024 by operation of a complicated statutory formula as a result of the 2000 redefinition of the actuarial value of plan assets. If made, PERA would join the Minneapolis Employees Retirement Fund as the only plans exempt from the general statute provision, which updates the target date based on benefit increases, actuarial assumption changes, and actuarial method changes. While MERF is a closed fund (no new active members after 1979), PERA is not. Upon a future PERA-General benefit increase, actuarial assumption change, or actuarial method change, the proposed resetting of the target date will actually work to increase PERA’s financial requirements rather than reduce them.
10. Appropriateness of the Proposed Additional PERA State Aid Program. The policy issue is the appropriateness of the additional $27 million annual State aid program proposed for PERA covered employing units contained in S.F. 810 (Pogemiller); H.F. ____ ( ), but not contained in S.F. ____ ( ); H.F. 855 (Mares). The additional State aid program for PERA is intended to offset the economic impact of the August 1, 2001 proposed 0.75 percent increase in the PERA additional employer contribution rate. There is precedent for the aid program in the 1997 benefit calculation, but in that case, the PERA $15.9 million aid program was funded from State contribution reductions to other pension plans. No similar reduction of State employer pension contributions is proposed now by the PERA Board and the State aid program will have significant impact on the State’s FY2002-FY2003 budget and the budget deliberations occurring this session.
11. Lack of Uniformity With Other General Employee Public Pension Plans. The policy issue is the lack of uniformity in benefit and related provisions between PERA-General and the other major statewide and local general employee pension plans. The proposed legislation prorates service credit for part-time PERA-General covered employees differently than the other plans, charges PERA-General members a great contribution rate than any other general employee pension plan, requires a longer vesting period of PERA-General members than of other general employee pension plans, provides a larger refund to terminating vested PERA-General members than is provided to other general employee pension plan members, and reduces the augmentation rte for deferred PERA-General retirees compared to other general employee pension plans. One of the arguments for the 1989 benefit increases was to increase benefit comparability between the various general employee pension plans by adding the "Rule of 90" to MSRS-General and TRA, thereby matching prior PERA-General practice. The entirety of the 1997 benefit increases were presented by their supporters under the argument of uniformity. The proposed legislation is absolutely inconsistent with uniformity.
12. Precedent. Closely related to the policy issue of a lack of uniformity is the policy issue of the proposed legislation becoming a precedent for future legislative developments. The proposed legislation sets a precedent for nonuniform pension legislation, especially if other general employee pension plans seek and gain various benefit increases during this Session. The proposed legislation also sets a precedent for widespread benefit reductions to resolve a financial shortfall rather than the more typical approach of seeking contribution increases. The expanded refund proposal, if recommended by the Commission, would certainly become the basis for similar refund increases by other pension plans, even though those plans do not suffer from the same lack of turnover gain problem.
13. Appropriateness of the Proposed Legislation In Light of Other Potential Remedies To The Problem. The policy issue is the appropriateness of the various membership, benefit and contribution modifications proposed by the PERA Board when there are other potential remedies to the PERA funding problem. The PERA funding problem, in summary, is that of a pension plan that has lagged the funding progress of the other statewide general employee pension plans in recent years and currently has a shortfall in its contribution levels of 1.96 percent of covered payroll when compared to its actuarial requirements. Broadly, a solution to the PERA funding difficulties will attempt to reduce the actuarial cost of the plan, increase the contributions to the plan, or both. Some options to do this that have been identified previously, but have not yet been explored in detail by the Commission and may merit additional Commission consideration, are as follows:

1. Potential Membership Changes.

• Reduce PERA Membership By Transferring School District Employees to TRA or to a New Separate Pension Plan. A review of PERA’s membership apparently indicates that school district employees produce a higher pension cost than county or city employees. If school district employees were transferred to the Teachers Retirement Association (TRA), the teacher retirement plan, or to a separate pension plan, the resulting PERA contribution requirement would likely be reduced.

1. Potential Funding Increases or Changes.

• One-Time Lump Sum State Appropriation. A state appropriation to PERA could be used to buy down a substantial portion of what otherwise would be the future annual funding requirement shortfall.
• Reshuffle Other Funding Support. As the Legislature did in 1997, when financial support sufficiencies in MSRS-General and TRA were redirected to PERA and to the first class city teacher retirement plans, the current MSRS-General, TRA, or Public Employees Police and Fire Plan (PERA-P&F) financial support sufficiencies could be redirected in whole or in part to PERA.

1. Potential Actuarial Assumption or Method Modifications.

• Increase Preretirement Interest Rate. The interest rate assumption determines the portion of actual pension plan cost that will be paid from investment income and an increase in the current PERA preretirement interest rate from 8.5 percent would reduce the portion of actual pension plan cost calculated in the actuarial valuations to be paid by contributions.
• Redefine the Actuarial Value of Assets. The 2000 Legislature changed the definition of the actuarial value of assets, increasing the PERA-General unfunded actuarial accrued liability by $44.9 million as a result. If the actuarial value of assets definition is returned to the pre-2000 definition, PERA assets increase by $44.9 million. If the actuarial value of assets for PERA was redefined as market value, PERA assets increase by $439.7 million, reducing the 1.96 percent of covered pay deficiency by 0.69 percent of covered pay.
• Reset The MPRIF Post Retirement Interest Rate. Minnesota Post Retirement Investment Fund (MPRIF) postretirement interest rate could be increased, which would also would reduce the recognition of the portion of the actuarial cost calculated to be borne by contributions. Because the MPRIF postretirement adjustment is based in part on investment performance in excess of an actuarial assumption, this change, however, also involves a benefit reduction.

1. Potential Structural Changes.

• Plan Consolidation. The consolidation of a pension plan with actual or potential funding problems with a pension plan with funding strengths, such as the consolidation of PERA with MSRS-General, would produce an average total cost for the resulting plan that may be more manageable.
• Fund Consolidation. The consolidation of the fund supporting a pension plan with actual or potential funding problems with a fund supporting a pension plan with funding strengths can postpone or eliminate any potential for a benefit payment default, such as the merger of the PERA retirement fund with the PERA-P&F retirement fund.
• Administrative Consolidation. The consolidation of the administration of one pension plan with the administration of another pension plan can save administrative expenses through the elimination of administrative duplications and the acquisition of greater economics of scale, such as the merger of the PERA and MSRS administration.

1. Potential Correction of Identified Benefit Abuses.

• The actuary retained by the Commission has identified preretirement "salary spiking" as a potential problem within PERA. The "salary spiking" phenomenon occurs when the salary of a retiring member immediately before retirement or during the "highest five successive years" averaging period increases dramatically over the person’s prior career salary history pattern, whether the salary increase arises from increased working hours and overtime pay or from late career promotions or unusual salary increases. If this is an actual benefit abuse, corrective action could be taken, such as eliminating overtime compensation from covered salary, or utilizing defined contribution plan coverage only for overtime compensation, or limiting end-of-career salary increases year to year to a specified percentage.